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Making Money In the Junior Market

One of the most challenging things that I have found with junior companies on smaller exchanges like the TSX Venture Exchange is sifting through all the companies that all say the same thing. Every junior company exploring for gold is going to tell you they are onto a deposit; every junior technology company will tell you that are building a platform that will blow the socks off of Facebook (FB) and Twitter (TWTR) combined and every junior oil and gas company will tell you that they are onto the next Bakken; so if everyone is telling you the exact same thing, which one do you invest in and how do you value the potential of an asset? That’s where Alphastox.com comes in. Alphastox.com has been able to provide investors around the world with detailed insight and analysis on the best performing juniors in 2013.

There are many pros and cons to the junior sector that every investor needs to be aware of. One of which is the extreme volatility. I have seen stocks trade up 200-300 percent a day and down with even greater force, winning and losing fortunes overnight. I don’t think there is any other industry in the world that can make you a millionaire and lose it all in the same day. This is precisely what attracts so many investors around the world- it’s the dream and the allure of making quick money that catches everyone’s attention. Although the game can be very exciting, one needs to make sure that any investment still makes sense on a valuation stand point. Evaluating a junior company is far different that valuing a blue-chip stock on the NYSE. Most of these companies don’t have a constant revenue stream that analysts can put into their model and provide a value for. So how do you do it? Since inception, Alphastox.com has been able to provide subscribers with companies that have generated investor’s substantial returns in a relatively short period of time. These returns have dwarfed any other junior newsletter in the space simply because of the strict discipline that I bring when analyzing potential companies to feature in my newsletter. Some investments take longer to perform than others, but if you follow the right strategy and valuation methods, over the long-run, you give yourself the highest probability of success. In an industry where success can be the difference between a stock going from $0.05 to $0.25 in a day or a $0.25 stock going to $0.02, it pays to do your due diligence. In my mind, there are four key distinguishing factors I look for before making any investment myself or recommend anyone else to do the same.

Management

Management is an extremely important factor in any company. Whether they’re running a junior exploration company or a multi-billion dollar company on the Nasdaq, management plays an extremely important role in building value for shareholders. Finding a good quality management team with a proven track record of success is extremely hard to find, but when you do, things can turn out to be very prosperous.

One thing you need to ask yourself before investing in any junior company is “how much skin do they really have in this company?” There are too many executives who sit on boards to pay their bills. They are flooded with options but have never invested single a dollar of their own money in the deal themselves so they only have something to gain and nothing to lose. Even if the company does poorly, management still collects a paycheck, but you as a shareholder, lose value…that’s where the true disconnect lies. That is why it is essential to invest in management teams that are aligned with your beliefs as shareholders themselves. When speaking with management teams, you need to make sure that your cost on the stock is similar to theirs. When a company is in its early stages and is just getting off the ground, if their cost is far cheaper than yours, you have a problem. Everyone needs to be on the same page. I look for management teams that are so invested in the company themselves that they have no choice but to make it work.

Management teams need to be buying their own stock. I have seen too many deals where executives preach the merits of their company as their stock goes down, telling the market how undervalued their stock is and how it presents a golden opportunity to pick up stock cheap. Whenever you hear that, the first thing you should do is ask one simple questions “how much stock have you bought during this downturn?” If your stock is down 50-60% and you feel it’s undervalued, shouldn’t you as management step into the market and acquire as many shares as humanly possible?” We’re all in this to make money and trust me, if there is an opportunity to make money, people will jump on it. So if you don’t see management doing it, there may be a problem…

Lastly, it is important for management teams to have a successful track record. It’s important to have a proactive management team that has already established contacts within the investment community where they have demonstrated success before. If I invest in a deal at its early stages, I want to know that this management team has done it before and are out to do it again. It only takes one bad deal to turn investors off, so you need to make sure you are always investing with winners.

Structure

Capital structure is another very important factor when valuing an early stage deal. When I look at deal, I look at the amount of shares outstanding, where these shares came from, whether they were rolled back or not and most importantly, everyone’s cost of them. If you position yourself in a company that has been rolled back several times over and everyone’s cost on their stock is at least 3-4 times greater than yours, you can be sure there won’t be going against you. Great companies can lose traction with bad structure and I have seen sub-par deals generate huge returns with great structures.

The outstanding shares need to be tightly held. Investors need to know where most of the paper is held, who owns it and what their cost is. If the structure is tightly held, it reduces the selling pressure on their stock and allows management to concentrate on their business at hand.

Insider Position

Like I mentioned before, insiders need to have a big position in the company at a similar cost basis to yourself. If you are investing in a junior company, you are taking a big risk so you need to know that everyone is positioned accordingly.

Investor Awareness

Investor awareness campaigns are very important in any early stage company. Companies need to make sure that the market is constantly kept aware and up to date with their progress so if they do in fact hit a great milestone, the market is able to reward them. There are a number of campaigns and strategies that companies use to get their story out which includes newsletter features, commercials, e-mail blasts, investor relations firms etc. The amount of time a company focuses on getting their story out to the market can sometimes be directly quantified to their stock price. I have seen far too many companies put out great news but the market doesn’t react because no one knows about it. Therefore, it is essential that investors are kept aware and are following your story.

So there you have it - a quick crash course on investing in the junior markets. It is always a lot more complicated than it seems when it comes to investing your own money so that is why I encourage all of you to subscribe to Alphastox.com for a free insight into my featured picks and company profiles. There are a number of newsletter’s that provide investors with detailed analysis of companies. Alphastox.com has been fortunate enough to feature some of the markets top performing companies of 2013.

DISCLOSURE:
The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer